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Are Earnings Really Bad?

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Friday, January 17, 2014

The Finance sector gave the Q4 earnings season a good-enough start, but the picture emerging from the few non-financial results thus far doesn’t inspire much confidence. Results aren’t necessarily worse than what we have become accustomed to in recent quarters. But given the recent improving economic backdrop, investors have been hoping that companies will trump the recent trend of negative guidance and start saying reassuring things about the current and coming quarters. We are not getting that and that's the disappointing part.

Including this morning’s reports from General Electric (GE - Analyst Report), UPS (UPS - Analyst Report) and Morgan Stanley (MS - Analyst Report), we now have 2013 Q4 results from 51 S&P 500 members that combined account for account for 15.7% of the index’s total membership. Total earnings for these 51 companies are up +15.1%, with 56% coming ahead of consensus earnings expectations. Total revenues are up +3.4% and 54% are beating top-line expectations. For the Finance sector where results from 44.8% of the sector’s total market capitalization are already out as of this morning, while earnings are up in double digits, thanks to easy comparisons, fewer companies have come out with positive earnings and revenue surprises.

Most of the results thus far pertain to the Finance sector and we haven’t seen any surprises there. It’s relatively early, but the handful of reports outside of Finance don’t inspire much confidence. Hard to put it any other way when looking at Thursday evening’s ‘misses’ from Intel (INTC - Analyst Report) and CSX Corp (CSX - Analyst Report) and this morning’s lackluster UPS report. When we compare the results for the 51 companies with how these same companies did in the last few quarters, the earnings growth is better, the revenue growth is about the same, while earnings beats are a bit on the light side and guidance still remains negative.

With about 200 S&P 500 members reporting results next week, we will be past the halfway mark by then and will have a good sense of the Q4 earnings season. The ‘headline’ earnings growth picture will likely remain the highest of the year and the total earnings tally will most likely make another quarterly record. But what everyone will be looking for is whether the tone and quality of management guidance will get any better from what we have become accustomed to in recent quarters. This has assumed significance following the recent upgrade to the economic growth backdrop

My sense is that the preponderance of guidance will remain negative, as has been the case for more than a year now. This will keep downward pressure on estimates for the coming quarters. Estimates have been consistently coming down for a while now, but we used to unequivocal support from the Fed back then. It will be interesting to see the market’s reaction to negative estimate revisions in the coming post-Taper world.

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